Sovereign funds take to emerging markets

With the US and Europe struggling, national wealth funds are more inclined to venture into the developing world, where the rapid growth promises profits.

Mobile phone vendors, above, in Lagos, Nigeria, where the embrace of technology has brought the country into fund managers' focus. Issouf Sanogo / AFP

Sovereign wealth funds (SWFs) have begun to embrace the white-knuckle ride of emerging markets.

The Public Investment Commission, a South African government pension fund with assets of US$156 billion (Dh573.01bn), has started diversifying its investments into the rest of Africa.

Some of the world's wealthiest state-owned funds intend to make similar moves. Singapore's central bank and Temasek, one of the country's wealth funds, are to begin diversifying into developing-world assets.

Norway's arch-conservative oil fund, which has largely stuck to United States and European stocks and bonds, is also girding itself for a venture into emerging markets, something that would have been unheard of a few years ago.

SWFs are relatively new creations, having been around no more than a few decades. Most were set up to house surplus wealth generated by resource-rich countries and preserve it for future generations. As a result, they were severely restricted in the kinds of investments they could make, often being limited to products such as European and US stocks and bonds.

However, many funds have begun reviewing this time-tested strategy.

One of the reasons for this is the market turmoil in the US and Europe over the past four years, which has shaken even the most bull-hearted fund managers. By comparison, developing economies, and particularly the Brics - Brazil, Russia, India, China and tag-along South Africa - have shrugged off the credit crisis relatively quickly.

"Whether it is sovereign debt or major stock markets, developed economies simply do not provide as healthy a risk return ratio," says Christopher Balding, of the HSBC Business School at Peking University Graduate School in China, who has studied SWFs.

Traditional markets such as the US and Europe will remain the favoured low-risk investment destination for some time to come, he says, but these no longer enjoy the exclusive support of the wealth funds that they once did.

"More than anything, it is putting developed economies on notice that they are no longer the default destination," says Mr Balding.

Another element in the shift is that emerging markets themselves are better at running the nuts and bolts of investing - laws have improved, most have heartily embraced mobile and internet communication, and expanding air links have put them in easy reach.

Simple improvements such as being able to sign up for a mobile phone in minutes in Nigeria, compared previously to a decade-long waiting list, have made emerging economies far more user-friendly and, therefore, a less-unknown quantity.

Fund managers are also growing more expansive as they build on years of expertise in specific sectors, such as oil, gas and tourism.

The growing energy, hospitality and telecommunications industries are especially attractive to Gulf funds, sectors that have played a pivotal role in developing the Middle East.

"Investors and countries tend to invest with culturally similar countries and in things they know," says Mr Balding. "Consequently, Gulf states investing in energy projects in Africa fits with what we would expect."

Property is another sector being given attention. Previously, wealth funds concentrated on bricks-and-mortar investments at home but largely limited their international exposure through investment funds, particularly in emerging economies. This profile is also beginning to shift.

Qatari Diar, the property arm of Qatar's sovereign wealth fund, which already has a $39bn portfolio, mostly in Europe, was reported last week to be considering moving into emerging markets.

Given that the world's largest funds are estimated collectively to have something like $5 trillion under management, they have been warmly welcomed in most quarters - but also have been viewed with a certain amount of wariness.

Large-scale land purchases in Africa, intended to help Gulf nations achieve food security, have alarmed many in countries where proximity to the soil is regarded as a birthright.

But it is the sheer size of the funds, and the belief that they could, if they chose to, use their considerable resources as political leverage, that raises some concern.

So far, however, funds have been cautious in their approach, and especially careful not to stir up the kind of jingoistic reaction that forced DP World to abandon US expansion plans a few years ago.

"While emerging markets are reasonable in taking a closer look at SWF investment, there is little evidence to date - with a couple of exceptions, primarily of Asian funds - that SWFs should be a point of concern," says Mr Balding.

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